Nifty Shades of Gray Marketing: A Split US Supreme Court - Majority Believes that Things Go Better with Coke

The U.S. Supreme Court yesterday delivered what is likely one of the most important copyright decisions from any court anywhere anytime. In a dramatically divided but decisively 6-3 decision in Kirtsaeng v. John Wiley, it held that copyright law could not be used to prevent the parallel importation into the USA of works lawfully made outside of the USA. In other words, legally made works can be bought and sold and resold on the “grey” (or “gray” for those not in the Commonwealth) market, according to common sense. As the EFF says, if "you bought it,you own it"'. If you own it, you can resell it. After the “first sale”, the copyright owner’s rights in the physical object are “exhausted” – hence the frequent reference to the doctrine of “exhaustion”.

In other words, copyright law will not be available to do what trade-marks law has also failed to do, which is to serve as a tool of international trade control, price discrimination, market segmentation and restraint of trade with respect to legitimately made goods for which the copyright owner has been paid and in respect of which the “first sale” has been made. Things are somewhat different in the EU - but that is not a jurisdiction that Canada would rush to emulate in this respect.

To be absolutely clear, the copies in question were not piratical or counterfeit. The American copyright owner got paid for these products manufactured abroad, with their permission. However, the quest to control the resale after the first sale, to control the channels of distribution and the pricing of the imported copies of these products into the USA, and to generally assert a right to control sale after “first sale” and to take advantage of higher American “what will the market bear” pricing was denied. As the EFF says, “You bought it – you own it”. It’s not quite that simple – but it’s now very close indeed. Basically, the owner of a copyrighted product can do with it what he or she wishes, other than copy it or infringe moral rights or break TPMs, where applicable.

The decision applies to all copies lawfully made anywhere – whether the product is a book, a chocolate bar, a wrist watch, a plane, train or automobile. It applies whether it is the product itself that is protected by copyright (i.e. books, in this case) or merely the packaging, labelling or other incidental aspect of the product. It should be noted that Canada has an elaborate sui generis regime to prevent the parallel importation of books – because book publishing has always been highly protected in Canada.

The Kirtsaeng decision could have important ramifications for Canada. It is consistent with the result of the six year old Supreme Court of Canada decision in Euro-Excellence v. Kraft, which involved copyright in a small logo on the packaging of Toblerone chocolate bars (I should disclose that I made the prevailing argument on behalf of an intervener, the Retail Council of Canada, in that case). The argument was highly technical, but essentially entailed that a copyright owner cannot infringe its own copyright. That argument carried the day in the only way that could have worked at the time – given the very inadequate record below. The two top courts of Canada and the USA have come to the same bottom line for most practical purposes, namely that copyright law will be ineffective to “thwart” parallel imports of grey goods – which are, by definition, legitimate. I’ll write a more detailed blog comparing the Kirtsaeng case with Canada’s Kraft case in the near future. 

It should be noted that some believe that the execution on paper of an assignment of copyright to a Canadian entity will entitle it to block parallel imports in accordance with the Kraft decision. However, such a tactic may very well backfire if adequately resisted. Such an assignment may be subject to attack as a sham or an abuse of copyright and may trigger unwelcome and unexpected tax consequences. More about this in the future. For now, see my comment prepared for the Law Society of Upper Canada. For practical purposes, copyright law is not a very practical way to block parallel importation into Canada.
 
The US decision is important to Canada for many reasons – not least of which is the imminent debate on Bill C-56, the anti-counterfeiting legislation, which includes several sometimes inconsistent references to parallel imports that could possibly have unintended or unforeseen results. Also, there can be little doubt that the lobbyists have already begun to work on Congress and the USTR to “undo” a result that some of their clients will find very difficult to accept. Such a development is a threat to Canada and other countries involved in trade negotiations with the USA, unless the negotiators stand their ground.

Kirtsaeng was a foreign student from Thailand studying in the USA. He figured out that he could import perfectly legitimate text books in English printed abroad and purchased by his friends and family in Thailand and resell them in the USA at a lower price than other channels. The profits from his little cottage industry import business helped finance his education. This is what most would consider to be free trade, competition and otherwise normal, entrepreneurial, and competitive capitalism His profits helped to finance his American university studies. The well-known publishers John Wiley decided to stamp out this very small challenge to the legacy business model of price discrimination based upon a tortured and technical result that been in place if not easily enforced as the result of lower court and two recent but inconclusive Supreme Court decisions itself over the years.

As is so often the case when copyright owners get excessively zealous in their quest for absolute control, multiple and layered payments, double-dipping and other excesses – they sometimes get more than they ask for. In this case, Wiley and an impressive alliance of amici representing the US copyright establishment went after a foreign grad student working his way through college. They must have been very pleased when a jury whacked him with $600,000 in statutory damages. But he appealed and Wiley and its supporters got a resounding defeat in the US Supreme Court that will be seen as a huge setback in the legacy book publishing, movie, music, entertainment, and more unenlightened quarters of the software sectors.

However, Wiley and other American copyright owners in various legacy and IP maximalist sectors believe that they are entitled to segment markets, practice international price discrimination and to charge what the market will bear in various geographic markets. Canadians are familiar with having to pay higher prices than Americans for precisely the same product – in part because not all Canadian importers are as aggressive as they could be in sourcing the perfectly legitimate “grey market” for “parallel imports” that would save their customers money and earn themselves greater profit.  Young Mr. Kirtsaeng, however, was undeterred. He succeeded in slaying the giant that even mighty CostCo had failed to successfully confront in the 2010 US Supreme Court in the 2010 CostCo v. Omega case.

At the risk of seriously oversimplifying  some complex jurisprudence and its consequences, the Americans have now caught up to Canada and perhaps even passed it for the moment with respect to “international exhaustion”, free trade and a judicial distaste for using IP laws for purposes for which they were never intended. Like, the Canadian decision, the US Court today was sharply divided – although the result and the splits are much clearer in the US case. The 6-3 arithmetic speaks for itself in this instance.

As per the Court’s summary, BREYER, J., delivered the opinion of the Court, in which ROBERTS, C. J., and THOMAS, ALITO, SOTOMAYOR, and KAGAN, JJ., joined. KAGAN, J., filed a concurring opinion, in which ALITO, J., joined. GINSBURG, J., filed a dissenting opinion, in which KENNEDY, J., joined, and in which SCALIA, J., joined except as to Parts III and V–B–1.

Note the additional shades of grey added by the Kagan + Alito concurrence and the partial reservation of Scalia's concurrence with Ginsburg and Kennedy.

Court watchers will immediately note that this alignment has nothing to do with traditional “liberal” v. “conservative”  or partisan appointment divide. Nor can it be said to reflect any “activist” v. “strict constructionist” divide. If anything, it may portend an emerging meeting of the minds of of a “purposive” and “libertarian” approach to intellectual property – and the solid rejection of the “maximalist” copyright views that one had come to expect from Justice Ginsburg, normally considered to be a “liberal” on other issues.

The result is not surprising for any who heard the oral argument – which featured a “parade of horribles”–  including why consumers and users’ rights in everything ranging from library books to used cars was on the line, if the overreaching position of Wiley and its supporters had been accepted. In the end, even the Government’s lawyer admitted that Kirtsaeng and his amici supporters’ list of “horribles” was “worse” (i.e. presumably even more horrible) than the alternative list.

The result is effectively a stinging rejection by her colleagues of Ginsburg, J.’s widely noted “obiter dicta” in the Quality King case a few years earlier. That case involved shampoo products that had been made in the USA, shipped abroad and imported back. She provocatively opined by way of obiter dicta in a concurrence that:

This case involves a “round trip” journey, travel of the copies in question from the United States to places abroad, then back again. I join the Court’s opinion recognizing that we do not today resolve cases in which the allegedly infringing imports were manufactured abroad. See W. Patry, Copyright Law and Practice 166—170 (1997 Supp.) (commenting that provisions of Title 17 do not apply extraterritorially unless expressly so stated, hence the words “lawfully made under this title” in the “first sale” provision, 17 U.S.C. § 109(a), must mean “lawfully made in the United States”); see generally P. Goldstein, Copyright §16.0, pp. 16:1—16:2 (2d ed. 1998) (“Copyright protection is territorial. The rights granted by the United States Copyright Act extend no farther than the nation’s borders.”). (emphasis added)

This time around, Wiley relied upon a passage from the majority in Quality King. In Breyer, J.’s words:

We cannot, however, give the Quality King statement the legal weight for which Wiley argues. The language “lawfully made under this title” was not at issue in Quality King; the point before us now was not then fully argued; we did not canvas the considerations we have here set forth; we there said nothing to suggest that the example assumes a “first sale”; and we there hedged our statement with the word “presumably.” Most importantly, the statement is pure dictum. It is dictum contained in a rebuttal to a counterargument. And it is unnecessary dictum even in that respect. Is the Court having once written dicta calling a tomato a vegetable bound to deny that it is a fruit forever after? (Emphasis added)

As for her controversial passage mentioned above, Justice Ginsburg admitted that her comment in Quality King was “dictum” but went on to say that “I disagree with the Court’s conclusion that this dictum was ill considered.”

Kagan, J. in her concurrence indicated that if Congress views yesterday’s decision “as a problem”, “it should recognize Quality King—not our deci­sion today—as the culprit.

The Kirtsaeng decision gets very technical, as inevitably do all decisions on parallel imports if adequately briefed and reasoned. It goes into great depth  based upon the interplay of key sections of the US legislation. But, in the end, it all boiled down to the common sense interpretation of five words: “lawfully made under this title”. In the end, the Court agreed with Kirtsaeng that this phrase was not subject to geographic limitation and applied to copies lawfully made abroad.

There is already much speculation about whether this decision could be a premonition of a surprise outcome in the pending Bowman v. Monsanto case about whether and how the “exhaustion” doctrine applies to patented seeds.

The importance of yesterday’s decision cannot be over stated. Two of the judges on the US Supreme Court who have long shown a great interest in copyright law and are both regarded as “liberals” on the Court have seriously split with each other. The split is symbolic in many respects of the overall state of affairs in copyright law, in which everyone professes to believe in “balance”, as long it is their own definition of balance. The result will be very inconvenient for the USTR in its trade negotiations in the TPP, where the Americans will find it virtually impossible – though it has rarely stopped them before – to say “Do as we say, not as we do”. No doubt, the lobbyists will be hard at work in that forum in order to “policy shop” a prohibition against parallel imports back into the US congress – but that won’t be easy, to say the least.

Ironically, Justice Ginsburg was explicitly very concerned about the future of US trade negotiations and treaties that are still only a glint in the USTR’s and various lobbyists’ eyes – a concern which many might find seriously out of place in a judgment of the  US Supreme Court: 

Quality King left open the question whether owners of U. S. copyrights could retain control over the importation of copies manufactured and sold abroad—a point the Court obscures, see ante, at 33 (arguing that Quality King “significantly eroded” the national-exhaustion principle that, in my view, §602(a)(1)embraces). The Court today answers that question with a resounding “no,” and in doing so, it risks undermining the United States’ credibility on the world stage. While the Government has urged our trading partners to refrain from adopting international-exhaustion regimes that could benefit consumers within their borders but would impact adversely on intellectual-property producers in the United States, the Court embraces an international-exhaustion rule that could benefit U. S. consumers but would likely disadvantage foreign holders of U. S. copyrights. This dissonance scarcely enhances the United States’ “role as a trusted partner in multilateral endeavors.” Vimar Seguros y Reaseguros, S. A. v. M/V Sky Reefer, 515 U. S. 528, 539 (1995).

In any case, her reference to the Vimar decision is misplaced, since the comment to which she apparently refers says that “courts should be most cautious before interpreting its domestic legislation in such manner as to violate International agreements”. In fact, not only are there no existing multilateral international treaties or agreements that prohibit international exhaustion. The TRIPS agreement expressly permits countries to come to their own conclusions on this issue. The fact that the USA may now want to forbid international exhaustion via future treaties should be of no relevance whatsoever to the US Supreme Court.

An aspect of this decision – which will be elevated no doubt to “sky is falling” proportions – is the often heard suggestion that US publishers, entertainment companies, software developers etc. may become reluctant to supply English language products to developing countries at lower prices for fear of seeing them shipped back to the USA as parallel imports. That argument may once have had some serious merit – but is increasingly moot as so many of these types of products are now provided digitally – and often controversially with DRMs of various stripes attached, including regional coding. This opens up a whole new debate about sale v. lease, and the future of TPMs, etc.  Moreover, the emergence of mega e-commerce entrepreneurs such as Amazon and the eBay phenomenon mean that the sustainability of price discrimination models is in serious doubt anyway. Finally, if students and other consumers in developing countries cannot get their needs for English language products legally satisfied at reasonable prices, they may resort to recourse to readily available online illegal sources and their governments may turn a blind eye except for token efforts at enforcement. That is simply a realistic observation. Don’t shoot the messenger.

The debate about domestic and international exhaustion has been going on for over a century. It is far from exhausted. But yesterday’s decision is a great victory for free traders and those who believe in the majesty and the wisdom of the common law (Lord Coke, no less who was referred to at length) and the role of the judiciary.

In closing, here’s the passage referring to Lord Coke (1552 to 1634) – which legal scholars will no doubt find to be delightful:

The “first sale” doctrine is a common-law doctrine with an impeccable historic pedigree. In the early 17th centuryLord Coke explained the common law’s refusal to permitrestraints on the alienation of chattels. Referring to Littleton, who wrote in the 15th century, Gray, Two Contributions to Coke Studies, 72 U. Chi. L. Rev. 1127, 1135 (2005), Lord Coke wrote:

“[If] a man be possessed of . . . a horse, or of any otherchattell . . . and give or sell his whole interest . . .therein upon condition that the Donee or Vendee shallnot alien[ate] the same, the [condition] is voi[d], because his whole interest . . . is out of him, so as he hath no possibilit[y] of a Reverter, and it is against Trade and Traffi[c], and bargaining and contracting betwee[n] man and man: and it is within the reason ofour Author that it should ouster him of all power given to him.” 1 E. Coke, Institutes of the Laws of England §360, p. 223 (1628).

A law that permits a copyright holder to control the resale or other disposition of a chattel once sold is similarly “against Trade and Traffi[c], and bargaining and contracting.” Ibid.

With these last few words, Coke emphasizes the importance of leaving buyers of goods free to compete with each other when reselling or otherwise disposing of those goods. American law too has generally thought that competition, including freedom to resell, can work to the advantage of the consumer. See, e.g., Leegin Creative Leather Products, Inc. v. PSKS, Inc., 551 U. S. 877, 886 (2007) (restraints with “manifestly anticompetitive effects” are per se illegal; others are subject to the rule of reason (internal quotation marks omitted)); 1 P. Areeda & H.Hovenkamp, Antitrust Law ¶100, p. 4 (3d ed. 2006) (“[T]he principal objective of antitrust policy is to maximize consumer welfare by encouraging firms to behave competitively”).

The “first sale” doctrine also frees courts from the administrative burden of trying to enforce restrictions upon difficult-to-trace, readily movable goods. And it avoids the selective enforcement inherent in any such effort. Thus, it is not surprising that for at least a century the “first sale”doctrine has played an important role in American copyright law. See Bobbs-Merrill Co. v. Straus, 210 U. S. 339 (1908); Copyright Act of 1909, §41, 35 Stat. 1084. See also Copyright Law Revision, Further Discussions and Comments on Preliminary Draft for Revised U. S. Copyright Law, 88th Cong., 2d Sess., pt. 4, p. 212 (Comm. Print 1964) (Irwin Karp of Authors’ League of America expressing concern for “the very basic concept of copyright law that, once you’ve sold a copy legally, you can’t restrict itsresale”).

The common-law doctrine makes no geographical distinctions; nor can we find any in Bobbs-Merrill (where this Court first applied the “first sale” doctrine) or in§109(a)’s predecessor provision, which Congress enacted a year later. See supra, at 12. Rather, as the Solicitor General acknowledges, “a straightforward application of Bobbs-Merrill” would not preclude the “first sale” defense from applying to authorized copies made overseas. Brief for United States 27. And we can find no language, context, purpose, or history that would rebut a “straightforward application” of that doctrine here.

Yes – remembrances of the basic great principles of the common law do go better with Lord Coke.

HPK

Rev. March 20, 21 2013